Concerns over ‘Islamic State’ funds entering Arab banks for terrorist operations: UAB Secretary-General

Hossam Mounir
10 Min Read
Total loans of Arab banks were $1.6tr by end of 2014, of which only 10% went to small and medium-sized enterprises, Wissam H. Fattouh, Secretary-General of the Union of Arab Banks (UAB) DNE File Photo

The Union of Arab Banks (UAB) is worried about militant ”Islamic State” (IS) funds entering banks and being used to attract young people to carry out terrorist operations, said Wissam H. Fattouh, Secretary-General of the UAB.

In an interview with Daily News Egypt, he noted the difficulty in banning dealings with banks located in areas controlled by IS, as the movement of funds across the border is uncontrolled, due to a lack of international laws to regulate this process.

He explained that the UAB is now working on three important files; combating the financing of terrorism, the financing of small and medium-sized enterprises, and financial inclusion.

The UAB will hold a forum this year about financial inclusion. In your opinion, what are the challenges that hinder the achievement of this goal?

In my opinion, the application of laws and instructions issued by global regulatory agencies, especially American ones, is one of the biggest challenges facing financial inclusion in Arab countries. It may also lead to clients leaving their banks and moving to the so-called shadow banking system. This is the title used to describe institutions that operate in banking business but are non-banks. They do not work under the central bank and are not subject to regulatory oversight.

According to World Bank statistics, there are about two billion people, equivalent to about 37% of the world’s population, outside the financial sector.

These laws and regulations imposed by global regulatory authorities, who rigidly enforce the principle of know-your-customer, changed the nature of work of the Arab banks and confused them so much that they are now worried about performing any transactions. This would affect the ability of Arab governments to achieve financial inclusion.

There is also a conflict between the claims of global institutions to achieve financial inclusion and their calls for banks to adhere to the laws and legislation that they [global institutions] issue.

How do Arab banks deal with this inconsistency?

Arab banks are obliged to follow US laws such as FATCA [Foreign Account Tax Compliance Act] or they will be exposed to other sanctions, including the cutting of relations by correspondent banks.

Here, I would like to point out that those international laws and regulations will remain in effect. There is no doubt about it. If we, as Arab banks, want to not adhere to them, we have to find another way to settle our banking transactions using currencies aside from the US dollar.

Statistics show that 63% of world banking operations are in US dollars, 27% in Euros, and 10% in several different currencies, including the Chinese yuan.

How do you think financial inclusion can be achieved in Arab countries?

I believe that expanding in the financing of small and medium-sized enterprises (SMEs_ in Arab countries can greatly help to achieve this goal.

It is through the financing of such projects that Arab governments can achieve more than one goal.

When we lend money to small enterprise owners and include them in the banking system, we help them start their own business. This creates new jobs, and reduces unemployment. Once the owner makes profit, they can teach their children, which will contribute to the fight against illiteracy. Collectively, they are in favour of achieving financial inclusion.

Will SMEs in the Arab region gain sufficient attention to activate them?

There are countries, such as Egypt, Morocco, and Tunisia, which have good experiences in dealing with these projects, but the statistics affirm that the road is still long for these projects to reach high growth rates.

The latest figures indicate that the total loans of Arab banks amounted to about $1.6tr by the end of 2014, of which only 10% are for SMEs. This is a very low rate compared to other countries, like the US, where loans directed to these projects amount to 90% of total loans granted by banks to various economic sectors.

I believe that in order to grow SMEs, banking culture needs to be changed. There is a variation in the definition of SMEs, not only in the Arab countries, but in all countries.

You have recently released an initiative for the Euro-Arab dialogue about drying up the sources of terrorist financing and to stop money laundering. What is the purpose of such initiatives?

Launching this initiative came during the Euro-Arab Banking Dialogue conference organised by the UAB in the Belgian capital, Brussels, recently about combating the financing of terrorism. It is a very important initiative, for Europe, the Middle East and North Africa, in order to join efforts to combat the financing of terrorism.

The UAB had established the Euro-Arab Banking Dialogue in 2006, with support from the US Treasury Department and the US Federal Bank. The Federal Banks believe in the importance of communication between Arab and US banks.

When we launched this dialogue in 2006, we aimed to combat money laundering. However, this goal changed now to include combating the financing of terrorism and the fight against the terrorist organisation, IS, by preventing any financing from reaching it through banks from people who believe in it.

It is no secret that the banking and financial sectors in the Arab region and the European region play a crucial role to combat the financing of terrorist activities. They bear a heavy responsibility to ensure proper protection against the illegal flow of funds.

What role can Arab banks play to prevent the financing of a terrorist organisation such as IS?

First of all, some people estimate the liquidity IS receives is at $1m a day, or $2m per week.

IS receives those funds through five sources. The first one is selling the petroleum of the areas, or countries, it controls. Some of the funds are also obtained through kidnapping citizens and asking for ransoms. You also have theft, as well as the imposition of taxes in the states they control. Finally, the donations are from people who believe in it.

The role of banks in depriving this organisation is limited to the fifth source, by preventing people from using banks to deliver funding to this organisation. Banks cannot fight the other four sources.

We fear that the funds of this organisation enter the Arab banks, especially in areas it controls. I believe that if any banks suspects any funds deposited in questionable accounts, it must freeze these funds and report them to the regulatory authorities. We are also worried about the possibility of using these funds to attract Arab youth and entice them to carry out terrorist operations.

What is the reason behind this concern?

There are frightening statistics about the situation in the Arab world. The unemployment rate, for example, rose from 13% in 2010 to about 15% by the end of 2014, because of the political shifts witnessed in some Arab countries. Some 50 million people are illiterate. They cannot read nor write. About eight million children drop-out from education. That means that IS targets about seven million people of the Arab world between the ages of 14 and 25 years.

Moreover, the cross-border movement of funds is uncontrolled, as there is no international law to regulate this process.

Why won’t the UAB ban dealing with banks in areas controlled by IS?

This is very difficult and lies outside the union’s jurisdiction. At the end, banks are under the control of central banks in their countries and there is no executive authority over banks in the whole world, except their central banks.

However, I would like to point out here that we are now witnessing banks cutting relations with one another, as they are located in high-risk areas, such as Lebanon, Syria, Yemen, Iraq, and Sudan. These are special cases though, and are based on each bank’s vision. Banks should study risks, ways to manage, address, and fix them, rather than cutting ties with one another.

Finally, what are the most important issues the UAB is working on?

We are currently working on three key issues; fighting the financing of terrorism, financing SMEs, and financial inclusion.


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